Third Party Logistics (3PL) Selection Process

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Logistics is serious business and if not kept in top notch condition lack of proper policies and procedures can become very costly. When companies do have logistic/supply chain concerns, they often turn to specialized consultants referred to as Third-party logistics (abbreviated 3PL, or sometimes TPL) in logistics and supply chain management is a company’s use of third-party businesses to outsource elements of the company’s distribution and fulfillment services. The following article provides a sequence of activities for selecting 3PL consultants.…election-process/

  1. Form an internal cross-functional team to investigate current company freight and logistics costs: Chose a 3PL implementation Project Leader or be guided by an external 3PL Consultant.
  1. Cross-functional, internal team to create a request for quotation (RFQ)/request for proposal (RFP) with consultant’s recommendations. The more detailed the RFQ/RFP, the better the quotation/proposal. Put a due date (7 days out) on the RFQ/RFP to measure the responsiveness of 3PLs. Send to at least three (3) 3PLs.
  1. Know all of your customers and their zip codes for delivery examination. We want the 3PL in the right location for our customers.
  1. IT requirements: Your IT Manager should address IT needs:

a. Warehouse Management System (WMS) integration,
b. Transportation Management System (TMS) integration for tracking your freight,
b. c. Yard Management System (YMS), and
c. d. Electronic Data Interface: (EDI): API, is a replacement for EDI: Application Program Interface (API) allows different computer systems to communicate with each other. Compared with standard EDI, API provides flexibility and enables a faster, more efficient exchange of electronic documents such as load tenders, customer orders, shipment status, and invoices.

  1. Request for information (RFI) from 3PL asking for additional Information needed to quote/propose.
  1. Quotations/proposals follow: Always be aware that these prices can change and are based on your FORECASTED requirements: your ACTUAL day-to-day requirements will change pricing. 
  1. Ask for clarification of RFI, if required.
  1. What sort of pricing structure are they offering: Gainsharing, cost-plus pricing, activity-based pricing and unit rate pricing.
  1. Is the 3PL asset-based (own their own warehouses/transportation) or non-asset based (subcontract warehousing and transportation)?
  1. Call at least three current customers of the shortlisted 3PL and obtain pros/cons.
  1. Choose a 3PL after analyzing the total, bottom line value to your company. Always have “fail-safe” backup 3PL, for if the chosen 3PL does not work out. 
  1. Check the 3PL’s financial strength. You can analyze a Dunn and Bradstreet report on the 3PL.
  1. Visit the chosen 3PL with a 3PL Checklist (the consultant has a 3PL Checklist).
  1. During the first visit:

a. Do you feel comfortable?
b. Is the chosen 3PL collaborative, flexible, understanding? and
c. Do you have “good chemistry” with the 3PLs top management and your 3PL daily contact person?

  1. Negotiate prices with the chosen 3PL during your visit. Negotiating prices while at the chosen 3PL’s facility work Clarify your forecast based pricing versus ACTUAL pricing.

a. Consider: Gainsharing, cost-plus pricing, activity-based pricing (pricing per move), management fee pricing, hourly pricing, which pricing is best for you? Examine them all.
b. Negotiate the per month charge: i.e., $ 1000/month flat fee plus prices and other fees.
c. Review accessorial prices: pallets, labeling, banding, shrink wrapping, etc.
d. How long are final, negotiated prices in effect?
e. Be aware of 3PL “upfront charges” on a new, large account for administrative setup. These upfront charges are negotiable.

  1. If you agree to a three-year contract, read the contract thoroughly or let your 3PL consultant review the contract in detail. Ensure that there is a cancellation/modification clause in the contract so you can cancel or modify the contract if the chosen 3PL is not meeting your expectations or a change is needed. There may be a Warehouse Contract (public warehouse or allocated, private warehouse space) and a Transportation Contract.
  1. Will the chosen 3PL agree to a Transportation Quarterly Business Review (QBR) which includes Transportation Management System (TMS) Optimization of routes and lanes, after 60 days of experience (cost reduction % agreement) with your company’s freight, and fuel surcharge (FSC) management? Do you have a carrier preference? This means NO AUTOMATIC increase of FSC, but negotiating FSC increases that come along frequently, increasing transportation prices. All transportation freight bills/invoices should be audited; quote versus actual billing: any variations?
  1. Always have your own terms and conditions of doing business. If the 3PL has terms and conditions and you do not, the 3PL wins in a court of law if there is a dispute of any kind. Watch out for terms and conditions on quotations/pricing sheets.
  1. Do you have Liability insurance? Cargo insurance? Cargo theft insurance? (Have the type of cargo identified on the Transportation Bill of Lading.) Other insurance? Does the chosen 3PL have liability and other insurance?
  1. Are there cargo security issues/policies in place?
  1. Returned Material Authorization (RMA): is there an RMA policy to inspect damaged “poor quality” goods upon receipt, and approve the return with an RMA number? Reverse logistics process? Return to vendor (RTV) policy?
  1. Will the chosen 3PL agree to a “win-win,” collaborative service level agreement (SLA) with key performance indicators (KPIs) for continuous improvement, with a monthly review? Collaborate with the 3PL: if the 3PL misses metrics/KPIs and/or delivery due dates to our customers, agreed upon penalties are in place to negatively reinforce the 3PLs missing metrics or KPIs. If there are too many detriments, the 3PL is put on probation for a period of time and may be replaced with another 3PL. Credits can also be discussed for positive activities, like meeting all KPIs/metrics.
  1. Is the 3PL, a Lean 3PL? 3PL culture in place/who is accountable/responsible? Is top management focused on Lean/Do they come to the shop floor and work with their associates to solve problems and improve processes daily? Daily continuous improvement? Does Kanban pull systems? Lean Six Sigma quality? Visuals are showing Lean focus and strategy and continuous improvement. Lean education frequency? 
  1. Does the 3PL manage your International Trade? Import/Export? Customs broker? Freight forwarder? Warehousing? Is there a Foreign or Free Trade Zone (FTZ) within the 3PL facility? 
  1. Does the 3PL have: 

a. Last Mile Delivery:is defined as the movement of goods from a transportation hub to the final delivery The final delivery destination is typically a personal residence. The focus of last mile logistics is to deliver items to the end user as fast as possible.

b. White Glove Delivery: The delivery agents will unload and place your items in the room of your choice. White Glove service generally includes unpacking, removal/disposal of packing materials and transporting your order up or down a maximum of two flights of stairs. 

  1. There may be other issues that come up as each 3PL tailors how they do business with their customers. You also learn new things as you move forward with 3PL management and selection.
  1. Eventually, someone like the 3PL Implementation Project Manager or 3PL Consultant has to manage day-to-day 3PL activities: e., monthly reviews of the SLA and quarterly reviews of the QBR to ensure all KPIs are met and you are both continuously improving. Especially focus on cost reduction targets through collaboration with the 3PL. Managing a 3PL can be a full-time position. Daily communication and collaboration with the 3PL are vital.

In summary, not selecting the best 3PL candidates can be costly as well as disruptive to normal operation. Using a selection process as described in this article will help reduce the risk of making a poor choice.

 Additional Reading

Top Talent: Supply Chain Operational Excellence

Top Logistical Concerns and How to Make Improvements

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